Greetings. Welcome to the Cinemark Holdings Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. At this time, I would like to hand the call over to Chanda Brashears, Senior Vice President of Investor Relations. Thank you. You may begin.

Good morning, everyone. I would like to welcome you to Cinemark Holdings, Inc.'s second quarter 2023 earnings release conference call hosted by Sean Gamble, President and Chief Executive Officer; and Melissa Thomas, Chief Financial Officer. Before we begin, I would like to remind everyone that statements or comments made on this conference call may be forward-looking statements. Forward-looking statements may include, but are not necessarily limited to, financial projections or other statements of the company's plans, objectives, expectations or intentions. These matters involve certain risks and uncertainties. The company's actual results may materially differ from forward-looking projections due to a variety of factors. Information concerning the factors that could cause results to differ materially is contained in the company's most recently filed 10-K. Also, today's call may include non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures can be found in the company's most recently filed earnings release, 10-Q and on the company's website at ir.cinemark.com. With that, I would now like to turn the call over to Sean Gamble.

Thank you, Chanda, and good morning, everyone. We appreciate you joining us today for our second quarter 2023 earnings call. We believe box office performance during the second quarter, combined with moviegoing results witnessed year-to-date and over the past 2 years, provide conclusive evidence that consumer enthusiasm to view compelling films in a shared, larger-than-life cinematic environment is as strong as ever. Theatrical moviegoing enthusiasm has been largely undeterred by the impact of the pandemic and the evolution of in-home streaming offerings, and it continues to demonstrate resilience against macroeconomic inflationary and recessionary dynamics. Year-to-date through July, North American industry box office results are up 20% over 2022 and have improved to within approximately 85% of 2019 driven by further recovery in wide release volume and sustained consumer demand for an in-theater viewing experience. On par with box office results, wide release volume has also reached almost 85% of 2019, which represents a meaningful uptick from last year when volume had recovered to approximately 65% of pre-pandemic levels over the same time frame. An improved cadence of new diverse content this year has helped accelerate moviegoing momentum across all categories of audiences, leading to a continued extension of impressive and, in many cases, record-breaking results throughout the year. In the first quarter, a series of strong releases exceeded expectations, including franchise-topping successes for Creed 3, Scream 6, and John Wick Chapter 4, the outperforming horror thriller Megan, the long-running adult drama A Man Called Otto, and the highly successful faith-based film Jesus Revolution. Then the second quarter kicked off with a bang as the Super Mario Bros. movie quickly became the industry's second biggest animated film of all time and our top-performing animated title ever at Cinemark. During the quarter, Amazon also expanded further into theatrical exhibition with Air under its Amazon film label, which delivered solid results. Evil Dead Rise, a movie initially made for streaming, further reinforced the positive impact of a theatrical release just as Smile did last year, grossing nearly $70 million in domestic box office. Marvel's Guardians of the Galaxy Volume 3 generated $845 million worldwide, which was comparable to its second installment, and Spider-Man: Into the Spider-Verse doubled the domestic results of its widely acclaimed first release, accumulating over $680 million worldwide. Franchise fans were further delighted by Fast X and Transformers 7: Rise of the Beasts, while families enjoyed Elemental and The Little Mermaid, the latter of which reached nearly $300 million in domestic box office and over $560 million globally. And if there was any question about the strength of theatrical viewing habits coming out of the second quarter, take a look at what just happened in July. The month got started with the faith-based sensation Sound of Freedom, which has already eclipsed $150 million in domestic box office and is still growing. The highly successful launch of that film was followed by the action-packed Mission Impossible: Dead Reckoning Part One, which has now generated more than $0.5 billion worldwide. And then on July 21, the Barbie and Oppenheimer phenomenon swept the world. The list of records for Barbie and Oppenheimer is already staggering and includes the first time ever 2 films open to over $80 million of domestic box office simultaneously, in addition to driving the fourth biggest box office weekend on record for our industry. For Cinemark, as a result of Barbie's and Oppenheimer's success, coupled with the impact of Mission Impossible and Sound of Freedom as well as other significant titles during the month, including Indiana Jones and the Dial of Destiny and Insidious: The Red Door, July delivered our biggest single month of admissions revenue in the history of our company. These aggregate box office results to date and the many discrete and varied examples of titles just described, which cut across all genres of films, all types and ages of audiences, and all times of the year demonstrate that consumer interest in theatrical moviegoing is strong and vibrant and remains a meaningful and preferential way of allocating discretionary time. The strength of the second quarter's film lineup, supplemented with the ongoing benefits we are achieving from our strategic initiatives, translated into exceptional 2Q results for Cinemark across our entire global circuit. We sustained our market share advances in excess of 100 basis points compared to prepandemic levels. Our box office results meaningfully outpaced industry performance year-over-year. And while our worldwide attendance trailed 2019 by 20%, we delivered the second highest quarterly adjusted EBITDA in our company's history, surpassed only by the second quarter of 2019, which included Avengers: Endgame, Aladdin, and Toy Story 4. Furthermore, our second quarter adjusted EBITDA margin of 24.6% was within 100 basis points of 2Q '19 and amongst our highest margin results of all time. In addition to the second quarter content mix that resonated especially well across our global circuit, our strong results are a direct byproduct of the focused efforts our sensational team has pursued to enhance the top-notch experience and service we provide our guests, to drive increased moviegoing frequency while expanding our audience base through more sophisticated marketing techniques, loyalty programs, and showtime planning to grow concession consumption through expanded offerings, enhanced sales channels, and category management optimization, and to gain incremental operating efficiencies through labor and cost management initiatives. A few examples include our continued expansion of premium offerings with recliners that now span almost 70% of our domestic circuit, premium large-format auditoriums, which represent approximately 5% of our worldwide screens and drove over 14% of our box office in the quarter, and D-Box motion seats which delivered a 65% increase in revenue year-over-year. We also continue to strengthen our ability to increase awareness of upcoming events, drive interest in seeing them, and improve conversion into ticket sales. In the second quarter alone, we generated over 2 billion marketing impressions through our actions to further enhance and leverage our omnichannel digital communication platforms. Likewise, the persevering appeal of our global loyalty programs, including our industry-leading subscription program, Movie Club, continued to drive meaningful box office upside. Movie Club now exceeds 1.2 million members and accounted for 24% of our domestic box office in the quarter. Importantly, customer satisfaction with Movie Club remains in excess of 95%, and we continue to find the program drives increased moviegoing frequency and food and beverage consumption. We're also benefiting from a wide range of additional food and beverage initiatives that we've been pursuing to increase purchase incidents and overall concessions revenues. Such initiatives include strategic pricing actions, growing and optimizing the portfolio of products we offer, and simplifying the purchase process through streamlined lobby designs, self-service capabilities, and our online mobile ordering platforms. Through the successful execution of these initiatives, we have grown our worldwide per cap 35% compared to the second quarter of 2019. Finally, we continue to make significant advances in our operating hours and workforce management practices. These advancements have yielded meaningful labor efficiencies as a result of actions that include enhancing theater-level demand forecasting capabilities, introducing more sophisticated staffing tools and techniques, simplifying and/or automating varied administrative routines, and improving our ability to actively scale operating hours and labor needs based on attendance dynamics. I'd like to thank our entire global Cinemark team for all the tremendous impact they have made, strengthening our company over the past few years, which enabled us to fully capitalize on the second quarter's rebound in film product. I'd also like to commend our studio and creative partners for continuing to produce such diverse and compelling content that provides something for everyone to enjoy in our theaters. While the second quarter and this past month of July provide additional positive steps in moviegoing recovery, as we look ahead, we are cognizant that the potential impact on product flow from Hollywood's ongoing SAG-AFTRA and WGA strikes are top of mind for our investment community. The evolution of these strikes is something we are watching closely, and their degree of impact on near-term film volume box office will ultimately depend on how long negotiations progress. We certainly remain hopeful for a timely resolution, not only with regard to implications for the theatrical exhibition industry and our studio partners, but also for the sake of the many individuals within the extensive creative community who are directly affected by this work stoppage. While the strikes are currently delaying the production of new films and they have the potential to shift certain movie releases, which could extend the recovery trajectory of theatrical film volume a bit, it's important to recognize that there has been nothing to suggest that they will affect key fundamentals associated with consumer interest in moviegoing or studio intentions to rebuild overall theatrical film output over the coming years. I've already commented on the strength and resilience of theatrical moviegoing based on box office results generated over the past 2 years as compelling content returned to the big screen. Considering this positive recovery to date has been achieved on the heels of a major global health crisis that was accompanied by a significant ramp-up of in-home streaming platforms, we have high confidence that consumer demand for theatrical experiences will remain strong even during periods of fluctuation in film product flow. We have also received no indications from our traditional studio partners that they intend to alter their plans for scaling theatrical film volume back to prepandemic levels. Furthermore, as we mentioned on prior calls, Amazon and Apple are now expressing intentions to scale theatrical film production over the next few years to levels that are comparable with the major studios. Amazon already had tremendous success with the release of Creed 3 and Air this year. And Apple will release 2 Epic films in the fourth quarter with Martin Scorsese's Killers of the Flower Moon and Ridley Scott's Napoleon. Apple also recently announced plans to release its third major theatrical title early next year with the spy thriller Argyle. Emerging genres of content in the form of faith-based, multicultural, anime, and concerts are also scaling up. These types of films contributed 7% of our box office in the first half of 2023, and we remain optimistic about their potential for further growth ahead. The reason why our traditional studio partners, streamers, and alternative content providers are fully leaning into theaters is their data and analysis continue to show that the best way to maximize value for these types of filmed entertainment assets is with an exclusive theatrical release. Furthermore, a theatrical release also drives material upside for subsequent distribution channels, including streaming platforms. Confirmation of these findings has been publicly communicated multiple times by the majority of the major media companies, and they continue to be reaffirmed in our direct discussions with our content partners. In addition to providing a premium viewing experience that is important to consumers, filmmakers, and talent, a theatrical release provides tremendous promotional and financial impact by eventizing movies and increasing their perceived quality. Doing so heightens awareness of and interest in seeing films and all forms of content, strengthening long-term recall value. Furthermore, experiencing content in a shared, larger-than-life cinematic environment produces an elevated degree of energy and engagement that form stronger emotional connections with stories and characters. These connections help build larger brands, bigger franchises, and more significant cultural moments. Again, just look at the cultural frenzy that is currently underway with Barbie and Oppenheimer. For all of these reasons, as we consider prospects for the recovery of new film releases as well as varied forms of content over the next 2 to 3 years, we continue to believe there is a high potential for overall volume to return to, if not exceed, pre-pandemic levels. In the meantime, Cinemark is well situated to confront any ongoing fluctuations in content flow. On account of our solid financial and operating foundation, the disciplined way we approach capital allocation, including the prudent steps we've already taken to fortify our balance sheet, the varied enhancements we've made to our operating practices that have improved our agility and ability to scale and flex in a dynamic landscape, and the many ongoing initiatives and opportunities we continue to pursue to drive further revenue and productivity benefits. The actions we've taken to strengthen our company have enabled us to generate positive adjusted EBITDA every quarter throughout all of the ups and downs over the past 2 years, and they were a key driver of our robust 2Q '23 results. Furthermore, we believe the benefits of these actions, along with our ongoing strategic initiatives, will continue to enable us to effectively navigate periods of variability while positioning Cinemark to capture an outsized portion of our industry's ongoing recovery and deliver long-term growth and shareholder value. Melissa will now provide further information on our second quarter results.

Thank you, Sean. Good morning, everyone, and thank you for joining the call today. We were pleased to deliver such solid results in the second quarter, which demonstrate the strength of Cinemark as well as the industry's ongoing recovery potential bolstered by steadfast consumer enthusiasm for the in-theater experience and a compelling film slate that resonated across our global footprint. Globally, we entertained 64.4 million guests during the second quarter, an increase of 24% year-over-year and the highest attendance level we've achieved post-pandemic. With our worldwide revenue increasing 27% to $942.3 million, we drove significant operating leverage over our fixed costs, growing adjusted EBITDA 67% to $231.5 million and achieving a robust adjusted EBITDA margin of 24.6%. This quarter's margins were a function of the heightened attendance levels, coupled with ongoing operational and strategic execution by our team that is second to none. Domestically, we served 38.8 million moviegoers during the second quarter, an increase of 14% year-over-year. Admissions revenue grew 21% to $373.4 million on an average ticket price of $9.62 for the quarter. Our average ticket price was up 6% versus the second quarter of last year, driven by strategic pricing initiatives and premium format penetration, somewhat offset by ticket type mix given the increase in family content during the quarter. The strength of the box office also flowed through to our concessions, with domestic concession revenue increasing 26% year-over-year to $296.3 million. Our concession per cap reached a new all-time high of $7.64 driven by strategic pricing initiatives and higher incidence rates fueled by the content mix in the quarter. Notably, our domestic concession revenue in the second quarter exceeded that of Q2 of 2019 by 8% despite 23% lower attendance levels due predominantly to higher purchase incidents. Other revenue was $65.2 million, an increase of 15% and relatively in line with our attendance growth in the quarter. Altogether, our Domestic segment generated total revenue of $734.9 million, an increase of 22% year-over-year, and adjusted EBITDA of $180.8 million, up 63% and our resulting domestic adjusted EBITDA margin was 24.6%, an expansion of over 600 basis points compared with the second quarter of last year. Turning to our International segment; we served 25.6 million patrons in the quarter, a sizable increase of 42% year-over-year. Our attendance recovery in international outpaced that of the U.S., reaching 85% of 2019 levels in the quarter, with a film slate that translated extraordinarily well across the Latin region, including Super Mario Bros., Fast X, and Spider-Man: Across the Spider-Verse, to name a few. We delivered $105 million of admissions revenue, $77.1 million of concession revenue, and $25.3 million of other revenue. In total, our international revenue increased 45% to $207.4 million. Adjusted EBITDA grew 86% to $50.7 million, resulting in a 24.4% adjusted EBITDA margin or 540 basis points of margin expansion year-over-year. Shifting to global expenses, film rental and advertising expense was 58.1% of admissions revenue, down 20 basis points compared with the second quarter of 2022, primarily due to marketing expense leverage and a higher mix of international box office, somewhat offset by the content mix in the quarter. Concession costs as a percent of concession revenue were 18.1% in the second quarter, down 30 basis points year-over-year as we successfully offset inflationary pressures with strategic pricing initiatives. Global salaries and wages were $112.1 million, up 12% year-over-year. As a percent of revenue, salaries and wages declined 160 basis points, driven by operating leverage due to the strength in attendance and benefits derived from our ongoing focus on labor efficiencies, which were partially offset by ongoing wage rate pressure. Facility lease expense was $87 million, up 8% year-over-year. As a percent of total revenue, facility lease expense decreased 160 basis points compared with Q2 of last year as we gained leverage over our lease costs, particularly in our domestic segment, where lease costs are predominantly fixed in nature. Utilities and other expenses were $120.2 million, an increase of 13% compared with the second quarter of 2022, primarily driven by variable costs such as credit card fees, utilities, and repairs and maintenance that grow with attendance. G&A was $50 million in the quarter, an increase of 4% from the second quarter of last year, driven by incremental headcount to support business recovery and our strategic initiatives, wage and benefit inflation, and higher stock-based compensation. That said, our headcount levels remain below 2019 levels, and we remain highly focused on controlling our discretionary spending. As a percent of revenue, G&A declined 120 basis points compared with Q2 of last year. Globally, we generated net income attributable to Cinemark Holdings, Inc. of $119.1 million in the second quarter, resulting in diluted earnings per share of $0.80. Turning to the balance sheet. We generated $215 million of free cash flow and increased our cash balance by $108 million to end the quarter with $758 million of cash. We remain balanced in our approach to capital allocation with a near-term focus on continuing to strengthen our balance sheet and invest in the long-term health of our company. We took steps to proactively address our 2025 debt maturities in the second quarter with the redemption of $100 million of our 8.75% senior secured notes and the successful refinancing of our credit agreement, where we secured a $650 million term loan maturing in 2030 and an upsized revolver of $125 million maturing in 2028. We maintain our 2x to 3x net leverage ratio target and expect to achieve that over time through adjusted EBITDA growth and free cash flow generation, both of which are contingent upon the timing and extent of overall box office recovery. We continue to make prudent investments in our global circuit with $28 million of capital expenditures in the second quarter and a full year target of $150 million. We expect roughly half of our capital investment this year to be allocated to maintaining a high-quality circuit and the remainder to ROI-generating opportunities, mainly premium amenities, new build theaters, and laser projector installations. As we look forward, we'll continue to align our capital expenditures with our box office recovery and free cash flow expectations. In closing, I would like to echo Sean's commentary regarding the long-term prospects associated with the theatrical exhibition industry and our company. At Cinemark, every aspect of our operations, strategy, and capital allocation is focused on setting the company up for long-term success, which benefits all of our key stakeholders, including employees, guests, creditors, and shareholders. We believe this approach has boded well for the company over the years, and we will remain disciplined in this regard. Operator, that concludes our prepared remarks, and we would now like to open up the line for questions.

Thank you. We will now be conducting a question-and-answer session. Our first questions come from the line of Ben Swinburne with Morgan Stanley.

Thank you. Good morning. It's challenging to determine how the labor strikes will affect everything since there are many moving parts. However, there seems to be some thought that September might be a realistic time to resume production. I would appreciate your insights based on what you're hearing. Specifically, I'm curious about two things. First, how might the production shutdown impact volumes in 2024? Do you still believe that there can be a return to higher supply next year if things wrap up by September? Secondly, talent availability is creating some near-term uncertainty. Do you have any visibility on how the holiday season in the fourth quarter might be affected by the shifting of movie releases? I understand this is not an easy question, but I'd like to hear your perspective since you have more information than we do. Additionally, for Melissa, I noticed that CapEx year-to-date is around $50 million to $55 million. Do you still anticipate spending about $150 million this year, or are there supply chain issues that might cause that number to decrease? I would like to get an update on that.

Thank you for the question, Ben. I wish I had clearer answers regarding the impact on the 2023 and 2024 film schedules. From discussions with our studio partners, it's clear they are doing everything possible to minimize disruptions in product flow and are aiming to avoid any further changes as much as they can. Much of this will depend on the duration of the ongoing negotiations. There have been reports that talks with the WGA are set to resume today, so hopefully, that will lead to progress. Sometimes these discussions can come together quickly even when they seem distant, while other times they can take longer. At this point, predicting the year-end is challenging. Typically, by this time, we would have a clearer view of what next year looks like, especially as we are optimistic about continued recovery in volume year after year, as we have seen recently. However, we still don’t have complete visibility on the upcoming slate since much is still in development, and the strikes could ultimately influence this. What we do know is that our studio partners are committed to creating plans to reduce disruption, and we will need to wait to see how long these discussions go on.

So, sorry, just a quick follow-up. Regarding your comment on Amazon and Apple, is your point about their ramping up production and the increased enthusiasm or clarity from last quarter? I know you've been anticipating their ramp-up, but it seemed like you were making a more emphatic point today.

No, I would say it's just more of a restatement of last quarter. I mean we're highly enthused by what we're seeing even the line of sight we had last quarter in terms of public comments made by Amazon and Apple. I guess since then, we've seen Apple date another significant film at the beginning of next year with Argyle. So nothing, I'd say, incremental to last quarter, just sustained enthusiasm about the direction that they're moving in.

Okay. And then with respect to CapEx, Ben, to your point, we did spend only about $55 million of CapEx in the first half of the year. However, we do expect to still hit $150 million of CapEx for full year 2023. So it's really timing of the spend is expected to be back half weighted.

Our next questions come from the line of Robert Fishman with Moffat Nathanson.

Two questions, please. Sean, maybe a big picture question to start. It's clear that the momentum is back in your favor given all the recent and record box office. So after a tough couple of years navigating through the pandemic, can you just share more about the entire company's confidence level in achieving record levels of success and the likelihood of profit surpassing pre-pandemic levels?

I would say that we've been very pleased with consumer behavior. There were concerns during the pandemic about how consumers would act afterward, but the activity surrounding moviegoing indicates a strong and sustained interest in attending films. This gives us confidence and optimism for the long-term outlook. We're also receiving positive feedback from studios about their plans to increase production to pre-pandemic levels, which we view as encouraging. Additionally, our strategic initiatives aim to maximize the enthusiasm and attendance of consumers, which should lead to positive margins moving forward.

Yes. And just to follow on to that, to give a little bit more context on our second quarter adjusted EBITDA margins, what you saw was our team's ability to really capitalize on the strength of the box office and a film slate that, as we stated, resonated particularly well with our circuit, and that led to especially strong market share, concession per cap as well as average ticket prices in the quarter. As we think about our long-term margin potential, we certainly have many initiatives that we're pursuing, both on the revenue side as well as the cost side to try to get back to those pre-pandemic margins over the long term. But there are, as you know, going to be a number of factors that that's dependent upon, not only attendance and box office recovery, which is the largest driver of our margins, but beyond that, our market share gains, elevated concession per caps and average ticket prices, the extent to which those persist, as well as our ability to offset further inflationary pressures that may materialize, and then the pull-through that we get on the strategic initiatives that we're executing on. But we're certainly pleased with our ability to deliver strong margins in the quarter and the momentum that we've seen.

Okay, great. And just a question about the competitive landscape if I can. You've highlighted how Cinemark has had the sustainable market share. You just mentioned it. Can you talk about where that has come from and maybe the opportunity to grow market share further? And how Cineworld's emerging out of bankruptcy could impact any of that, if at all?

Sure. We previously noted that we experienced an increase in market share as we reopened during the pandemic, being among the first cinemas to do so. This allowed us to attract new audiences who may not have visited us regularly before, and they have continued to enjoy the experience we offer. The increase in share is not due to any single factor; rather, we invested significant effort in enhancing our marketing capabilities, which we believe are now leading the industry in terms of awareness and reach aimed at encouraging more film attendance and visits to Cinemark. We've also been refining our strategies for planning showtimes and operating hours, which contribute positively to our performance. Additionally, the overall guest experience is something we've prioritized for a long time, even before my arrival at the company. It's part of Cinemark's core values to provide exceptional customer service. Looking ahead, we aim to maintain these improvements, with an expectation of a 100 basis points increase in comparison to pre-pandemic levels now that most theaters and screens are back in operation. However, we anticipate fluctuations quarter-to-quarter based on the variety of content available and its reception among different demographics. For example, in the second quarter, certain films resonated particularly well in our markets, especially family-oriented, horror, and specific action genres appealing to Hispanic audiences. Conversely, in July, despite achieving our highest admissions revenue month ever, the titles available were less aligned with our audience's preferences. As such, we expect a slight downturn in the third quarter. While our numbers may vary, our main focus remains on continuing the initiatives that have supported our progress. Regarding Cineworld and Regal, we believe their strengthened financial position may enhance their competitiveness moving forward. We hope that by providing a positive experience across the industry, we can elevate the entire market, benefiting everyone involved.

Our next questions come from the line of Eric Handler with Rob at GM.

Sean, I understand that Cinemark has traditionally been cautious with its balance sheet, but you’re currently at 3.4x net leverage. You have a solid cash reserve available. How are you considering possibly relaxing your purchasing approach and increasing capital expenditures for additional return on investment projects, or perhaps buying back some debt in the open market for a beneficial impact? I’d like to hear your thoughts on this.

Sure. I'll hand it over to Melissa to provide more details on that. It's a topic we frequently discuss. We are focused on restoring our balance sheet while also exploring various initiatives. Melissa, please go ahead.

Sure. So in terms of capital allocation priorities, those remain centered around 2 main areas: strengthening our balance sheet, which includes delevering and then making the right investments to position the company well for the long term. As we think about the go forward, certainly, as I mentioned in my prepared remarks, we're targeting a net leverage ratio in the 2 to 3x range. As Sean mentioned, we are in regular conversations around our capital allocation priorities. But one thing to keep in mind is we'll look to be opportunistic in paying down debt and delevering given our cash position. But at the same time, given some of the current industry dynamics that could cause some potential shifts in film slate, you can expect us in the near term to be conservative with that cash on hand.

Yes. And the only other thing that I would kind of supplement that is, obviously, we view that as a good position with kind of contending with any near-term uncertainty that may be out there, but also then being able to be really opportunistic as different types of things, different kinds of opportunities may shake out of this environment. So we feel that we're not only in a position of strength to navigate ongoing fluctuations but also to capitalize on opportunities as they come our way during the course of the coming year.

Great. That's helpful. And then just as a follow-up, with National CineMedia's bankruptcy and the emergence and restructuring, what's different, if anything, at all, in your agreements?

Well, for the time being, it is largely business as usual. They have a plan, a bankruptcy plan that's been approved. And as I understand, they are expecting to emerge sometime this month or next. They've accepted our pre-existing contracts. So we continue to operate according to that. So for now, there haven't been modifications to that contract. Any future modifications will be something that would be mutually agreed upon, and that's to be determined.

Yes. The other thing that I would just mention there is based on the terms of their restructuring. So as you know, we have our ESA, which is where we earn ad revenue. But then in addition to that, we have our investment in NCMI. Based on the terms of their restructuring, we do expect their outstanding debt will be converted into equity, and our ownership interest will reduce from 25% today to less than 5%. So that would impact the value of our investment and any share of any potential future dividends that they may pay out. And as you probably will see in our financials, that investment, we've reduced that considerably over the years. So I'd say the degree of exposure on that is minimal at this point.

Our next questions come from the line of Omar Mejias with Wells Fargo.

Sean, maybe first, we've seen a few films shifted away from the back half of the year to 2024 as a result of the writers and actors strike? Do you expect any additional films to move out of the 2023 schedule? And Melissa, maybe on the strength of your ATPs and per caps, you guys have previously talked about modest growth for the back half of the year, but that remains elevated with average ticket pricing and per caps running around mid-single digits, albeit in a double-digit range. Can you just cut maybe what's driving that? And how should we think about 3Q and 4Q?

Thanks, Omar. It's still hard to say for the end of the year with regard to any further shifts. There's a lot of work and a lot of planning underway to try to limit the amount of impact. There will be on that. A lot of that is going to ultimately just depend on how long the conversations and negotiations continue and the availability of writers, different resources that may be required in the form of writing and/or just promotional support. So we're going to have to see.

And then with respect to average ticket prices and per cap, so I'll start with the average ticket prices. We do continue to believe we can modestly grow our ATPs for the full year of 2023 relative to 2022 levels. But our average ticket prices will fluctuate quarter-to-quarter. If you think about the back half of this year, we expect our average ticket price growth rate to moderate due to the film mix, and that's particularly given we'll be lapping the significant lift from the 3D penetration on Avatar from last year. So that's something to keep in mind. And then in terms of per caps, we again continue to believe we can grow our per caps year-over-year in the second half of 2023. However, per cap similar to average ticket prices, those fluctuate quarter-to-quarter with film mix. For context, if you think about our Q2 per cap, that benefited from the film mix in the quarter with the film slate that not only drove an audience mix that skewed younger and tends to purchase more on the concession side, but it also provided more opportunities for us to sell film merchandise. Conversely, as we think about the second half of the year, we are expecting our year-over-year concession per cap growth to moderate. And that's again driven by the upcoming film slate. And we've already seen that play out in our per cap in July with a more adult skewing film slate that drove an audience mix that's just typically less inclined to indulge on the concession side.

Our next questions come from the line of David Karnovsky with JPMorgan.

Maybe to follow up on the pricing loans. Maybe in Q2, can you unpack a bit what strategic pricing versus PLS, what the offset was from the mix? And then Chanda, I don't know if there's any detail you could provide with the strategic pricing. You've noted it for a few quarters now. What's sort of resonating there? Any incremental color on that would be great.

Yes. So on the average ticket pricing, if we look at domestic ATPs, we're up about 6% in the quarter. About 5 points of that strategic pricing, a point of that is format mix, so premium format mix, and then offset by ticket type mix.

And just in terms of reference to strategic pricing, I think it's one of the areas that we have viewed as an area of opportunity for a while in terms of strengthening our use of data and analytics around pricing. We've for a long, long while had varied pricing throughout the day, throughout the week, that's tailored to high-level demand patterns that we've seen over time. And we just continue to drive that down further to more discrete levels on a by theater basis, but with the use of data. So it ranges in terms of just tailoring levels of price on a more active basis to varied levels of demand both for moviegoing in terms of our tickets as well as our food and beverage prices. So with that, we found success in capturing upside both from price in certain circumstances, but importantly, just in terms of frequency and consumption and really getting that equation right to maximize box office, maximize attendance, and maximize overall concession revenues.

Okay. And then, Sean, you noted the 3 films in Apple earlier. Just wondering, do you have a sense yet for Apple or Amazon what run rate fleets might look like not in the next 6 months, but in the next couple of years? Right? What could this maybe contribute to overall box office in terms of volume or revenue?

Sure. Amazon has publicly stated their intention to release around 8 to 12 films each year. Considering this volume, our expectation is that these films would likely vary in size, ranging from small to mid-tier and including more significant blockbuster films. Such a level of output aligns with what you would expect from a major studio. Apple has also indicated a similar approach, possibly not matching that specific number but suggesting spending of about $1 billion annually. If this continues, it could result in nearly two additional major studios entering the market, which would significantly boost overall volume over time.

Our next questions come from the line of Stephen Laschet with Goldman Sachs.

Maybe for Sean, with the actors and other influencers unable to promote movies like it typically would given the strikes. I was curious if you see the need or maybe the opportunity for studios and perhaps the theater operators and partnership to invest more in advertising in the back half of the year. Just curious if you think that there's added return opportunities on this type of spend.

Stephen, I'll take this one. Regarding our marketing spend, we do not expect any meaningful changes in our spend on account of the strikes. Our spend does vary quarter-to-quarter based on our expected attendance and ROI. But for the full year, we're still expecting marketing expense as a percent of revenue to remain largely in line with 2022 levels.

Got it. And then, maybe just a higher-level question on merchandising. We saw a series of merchandising initiatives around the Barbie movie last month, I think Cinemark or token that with some collectible items. I'm just curious how you think about the merchandising opportunity going forward. Just something you think you might want to get bigger into maybe as it seems the content becomes more linked to consumer IP, if that's something to win deeper into.

We believe there are additional opportunities in merchandising that depend on the types of films available. The first half of the year was particularly strong for merchandise sales due to the variety of films released, while the second half may be less robust. However, we see ongoing potential as consumer consumption remains high and may even be increasing. We are expanding our offerings in theaters and have also enhanced our e-commerce capabilities. Customers can now purchase merchandise through our app and website, allowing us to continue serving them online even after items sell out in theaters. This has led to a notable increase in online purchases for popular items. Additionally, our online store enables us to offer a wider range of products consistently, unlike the limited space in our theaters. We view this as a promising opportunity that can contribute to growth in per capita sales in the future.

Our next questions come from the line of Jim Goss with Barrington Research.

I wanted to inquire about the emerging genres you mentioned. I believe you noted that approximately 7% of your revenue is derived from a mix of faith-based films, cultural influences, Indian, Japanese, Hispanic, and possibly other areas. It seems you are discovering new audiences that are taking advantage of the opportunity that exists. How sustainable is this? Clearly, this is contributing to the incremental growth that is helping you achieve better results.

We believe it's a great question, and you're correct that about 7% of our box office results in the first half came from this area. We see it as a sustainable category. For a long time, we anticipated that alternative content had great potential, but it was frustrating that its growth was limited until now. It has taken some time for this category to gain traction, but we're finally starting to see more momentum. The demand for multicultural films is increasing among a wider audience, and the scale of these films has also improved, which enhances their quality and reach across cultures. We're beginning to see more diverse events in areas like concerts and gaming, and we're seeing strong performances from faith-based films, such as Jesus Revolution and Sound of Freedom. Overall, we still see opportunities here. Historically, we think around 5% of box office is a reasonable expectation, and as more Hollywood content emerges, it will contribute to a larger overall figure. We believe there's considerable ongoing potential for growth based on current trends in these categories.

I would like to inquire about the trends in film rental margins. Given the presence of blockbusters, I had anticipated more favorable trends, but there have not been as many films reaching the higher levels. Additionally, I thought there might be some concessions related to how you have managed distribution windows over the years. However, the margins are not quite where I expected them to be. I'm curious to know if you believe they are at the appropriate level and if you have any insights on the progression of film rental margins.

In the quarter, we observed that as the overall box office increases, we are seeing more high-grossing titles, which positively affects our film rental rates. Looking ahead, we expect our film rental rates to be influenced by a greater presence of blockbuster films. However, our rental rates will fluctuate from quarter to quarter depending on the volume and type of content released during that time. We are still benefiting from economic considerations related to window reductions, but this, too, varies based on release patterns each quarter.

Yes. And I would just add, Jim, just a quick data point. When we look at the top 5 films in the second quarter of this year, they were about 62% or so of our box office when you consider what they were in 2019, it was about 53%. So we're still seeing more of the remaining gap of film volume in some of those smaller titles. So those have made a big advance this year versus last year, but that's an area that's still to fill in, and it just puts a little bit of a mixed drag on that overall metric. That, coupled with some of the incremental spend that we're doing, which also hits that line item from an advertising and promotion standpoint, which we think has been net-net compared to 2019, valuable in sustaining our market share. Another piece to one of the questions that was asked before.

Thank you. Our next questions come from the line of Eric Wold with B. Riley.

A couple of questions. I guess, first, can you update us on kind of what you're seeing with labor wage rates domestically and in Latin America? And how would you characterize the staffing of the theaters relative to where you want to be at this point in terms of still looking to manage costs and margins, but not impacting the guest experience?

I'll take that one. In terms of wage rates, we are still experiencing some pressure, with our wage rates up about 5% year-over-year. This is down from the trend we were observing over the past couple of years. While there is wage rate pressure in certain areas, we are not facing market-driven pressure to the same degree as before. Currently, what we are seeing year-to-date is more related to state government mandated increases rather than the dynamics of the labor market. Regarding our staffing situation, as we prepared for the summer season, we successfully staffed the theaters to our intended levels, which is a positive change compared to the staffing challenges we faced over the last two years. Overall, the dynamics are looking better.

Yes. And I would just add for Latin America, similar dynamics to what Melissa said, albeit I think in many of those markets, some of the increased inflationary challenges that we've seen here in the U.S. are more commonplace in those markets. So that's more of the norm, and our teams there are very adept at dealing with those types of dynamics. So it's been more of a newer phenomenon in the U.S., but we've got a lot of experience in that market. And staffing levels are where we need them to be there, and we're continuing to do what we can to offset and manage the cost of normal market inflation.

And then, just a follow-up, maybe taking the more EBITDA margin question from earlier on a different route. I guess I know there's a lot of uncertainty in terms of what inflation you may do in the coming years, how the film slate may continue to ramp and box office recover. But given what you saw in the second quarter in terms of margins, do you feel that the current operating structure and cost structure and kind of per cap spend levels can allow margins to get back to pre-pandemic or above pre-pandemic levels if the box office fully recovers in the coming years, but attendance continues to lag revenue at the same level it is now?

So I mean, there's a lot still in flux, so it's hard to say. But I think maybe said another way, we don't necessarily believe that we need attendance to fully recover in order for margins to recover. So that's going to depend on the factors that we talked about like market share per, all that you highlighted. But as you saw in the quarter, attendance doesn't necessarily need to get back to those pre-pandemic levels.

Our next questions come from the line of Chad Beynon with Macquarie.

With regard to your premium format screens, is there a level of penetration you'd like to get to over the medium term? And how does that rank among your priorities versus some of the other ROI-generating opportunities you mentioned?

Ari, thanks for joining. Look, we've been very pleased with what we're seeing with premium consumption across the board, not just our screens, but our D-Box motion seats, our food and beverage, our responsiveness of audiences to recliner seats. I mean it really cuts across all the different premium offerings. As far as priorities, it's an area that certainly is ranking high on our ROI priorities because the returns have been really strong. I'd say, target-wise, specific to the screens and auditoriums; one of the governors on that is just the size of the auditoriums across our existing fleet. So if we're adding new theaters that provide a lot of flexibility. When we're talking about existing theaters, we want to make sure it's the right scale of experience. You need to have a large enough auditorium for the overall experience to be appropriate. So we don't undermine that product. So we do see a sustained opportunity there to a certain degree for certain second XDs in marketplaces here and there. But I would say, in fact, it's a piece of the overall prioritization effort we're doing regarding our CapEx, like there's a number of other things that are really positive. So it's high on the list. The degree of which we're doing that really is balanced with a range of other things. And then, like I mentioned, just the types of auditoriums and the size of the terms that we have available to us at this point.

Okay, great. That's helpful. And then can you help us just understand the inflation picture in Latin America and how that's affecting the consumer? It's good to see the international recovery continuing, but just wondering how that's trending currently.

Sure. It's interesting, as I kind of was alluding to before, the high inflation is something that most of these markets are very accustomed to because it's not unique to retail. It's not unique to our industry. It really cuts across everything in these markets. And what they've become more accustomed to there than here is pricing growing at a comparable level to inflation. So typically, what happens is wage rates go up, cost of utilities go up, cost of groceries go up, and people just take the pricing of goods and services up at a similar level, and that's how things go. And the consumers accept that. They expect it because it's, like I said, it's almost just the way many of these markets operate. Here in the U.S., it's a little bit of a different dynamic because we're not accustomed to higher levels of inflation. So you got to be a little bit more careful on the aggressiveness of pricing just to try to match some of the cost escalation that's been there because there can be a sticker shock that happens here that doesn't happen there. So I would say, again, LatAm, it's more of the norm, and it's something that really hasn't been a near-term or newer issue that they're contending with.

Got it. Appreciate the color, and congrats on the quarter.

There are no further questions at this time. I would now like to hand the floor back over to Sean Gamble for any closing comments.

Thank you, and thanks, everyone, for joining us again this morning. In closing, I'd just like to reiterate our optimism about the future of the theatrical exhibition and our company. Long-term indicators regarding consumer interest in theatrical moviegoing and film volumes remained positive, and Cinemark maintains a highly advantaged position to capitalize on our industry's continued recovery through our ongoing strategic initiatives and the many actions that we've already taken to enhance the experience as we provide our guests, advance our operating capabilities, and strengthen our financial position. So thank you, and we look forward to speaking with you again following our third quarter results.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy your weekend.